Deck 37: Secured Transactions and Suretyship

Question 1

Revised Article 9 of the Code greatly complicates the provisions regarding the place(s) for filing a financing statement.

Answer 1

False

Question 2

If a security interest has attached, it is enforceable against the debtor.

Answer 2

True

Question 3

First Bank repossessed Bob's television after he missed his last two $50 payments on it. He came to the bank with the $100 plus service charges and expenses of repossession. The bank will have to give him the television as long as they have not disposed of the television or have not made a contract to sell it.

Answer 3

True

Question 4

A bond, which is an evidence of indebtedness, may serve as collateral.

Question 5

If two parties have unperfected security interests in the same collateral, the first to attach has priority.

Question 6

Under most circumstances, a creditor who files a completed financing statement can be assured that the security interest is perfected.

Question 7

A buyer in the ordinary course of business takes collateral free of a perfected security interest created by the
buyer's seller.

Question 8

First Finance Company perfected its security interest in Donald's auto on March 1. Second Finance Company perfected its security interest in the same auto on April 1. If both parties have properly filed their finance statements, First Finance Company has a priority interest in the auto.

Question 9

A debtor must sign a written security agreement for a pledge used to secure a loan.

Question 10

UCC Article 9 defines a secondary obligor as being a consignee.

Question 11

Goods and other inventory items cannot be used as collateral.

Question 12

An automobile buyer in the ordinary course of business will take free and clear of a security interest created by the
buyer's seller.

Question 13

A security agreement may include only presently owned inventory, accounts, or equipment of the debtor, not property that is subsequently acquired.

Question 14

A purchase money security interest in equipment takes priority over a conflicting security interest if the purchase money interest is perfected within thirty days of the debtor's receipt of the goods.

Question 15

UCC Article 9 applies to secured transactions in which the debtor provides a security interest to secure payment of a debt, such as pledging warehoused goods to a creditor or the creditor's having a mechanic's lien against the debtor's property.

Question 16

The same item may be classified as either equipment or consumer goods, depending on how it is used by the debtor.

Question 17

If Sharpe Finance Co. has a secured interest in Jeff's car and Jeff is in default, in most states Sharpe may take the car from in front of Jeff's house without getting a court order.

Question 18

Article 9 applies to secured transactions in both real and personal property.

Question 19

If a secured party moves within the state after filing the financing statement, the filing becomes ineffective.

Question 20

"Perfection" is required in order for the secured party to enforce rights against the debtor.

Question 21

Melissa signs a suretyship agreement that contains both her name and that of her friend Gayle as intended cosureties. Gayle did not sign the agreement. Melissa is liable since she signed the agreement.

Question 22

A primary reason for requiring a surety is to reduce the creditor's risk of loss.

Question 23

A security interest in consumer goods, except motor vehicles, is automatically perfected upon attachment.

Question 24

A conditional guarantor of collection differs from an absolute surety in that the surety is bound with the principal debtor as a primary obligor.

Question 25

Rodrigo lends money to Isaac on Linda's promise to act as a surety. Rodrigo's extension of credit is the consideration to support Isaac's promise to repay the loan and Linda's suretyship undertaking.

Question 26

If a minor principal disaffirms a contract and returns the consideration, the surety is discharged.

Question 27

Ted cosigns a note for his son Junior. Ted is a surety on the note.

Question 28

If the creditor refuses to accept tender of payment by the principal debtor, the surety remains liable until the creditor wants payment.

Question 29

A security interest in fixtures, such as furnaces, central air-conditioning units, and plumbing fixtures, may not arise under UCC Article 9 since fixtures have become so related to real property that an interest in them arises under real estate law.

Question 30

If a principal debtor defaults on a loan, an absolute surety will have to pay upon demand of the creditor.

Question 31

Although in theory there is a distinction between a surety and a guarantor, in common usage the two terms are almost synonymous.

Question 32

A discharge of the principal debtor's obligation in bankruptcy does not discharge the surety's liability to the creditor
on that obligation.

Question 33

Sureties have a right of exoneration against their cosureties.

Question 34

A creditor will have to exhaust all the possible legal procedures to try to collect from the principal debtor before he can collect from a conditional guarantor of collection.

Question 35

Generally, if the creditor releases the principal debtor, then the surety is also discharged.

Question 36

If a financing statement in movable property is properly filed and the debtor moves to another state, the security interest remains perfected if the financing statement is filed in the new state within four months of the move.

Question 37

Substantial compliance with Article 9's financing statement requirements is sufficient for a valid perfection, despite minor errors in the statement that are not seriously misleading.

Question 38

The purpose of bail bond in a criminal proceeding is to assure the appearance of the defendant in court.

Question 39

A surety agreement must always be in writing to be effective.

Question 40

The surety, as defense to payment, may assert a principal debtor's defense of minority.

Question 41

Dr. Wells purchased a refrigerator for use in his home. The refrigerator will be classified as:

A) consumer goods.
B) equipment.
C) farm products.
D) inventory.

Question 42

The delivery of personal property to a creditor as security for the payment of a debt is:

A) perfection.
B) a pledge.
C) attachment.
D) a general intangible.

Question 43

Automatic perfection would occur in which situation (assuming a written security agreement)?

A) Mary buys a refrigerator for her apartment on credit.
B) Carl buys a computer for his office on credit.
C) Carl buys a computer for his office by borrowing the money for the purchase.
D) Mary buys inventory for her home-based sewing business.

Question 44

A perfected security interest has priority over:

A) only an unperfected security interest.
B) only a lien creditor who acquires a lien after perfection.
C) a previously filed security interest.
D) both an inperfected security interest and a lien creditor who acquires a lien after perfection.

Question 45

In a suretyship, the creditor's rights against the principal debtor are determined primarily by the contract between them.

Question 46

Article 9 of the UCC would govern transactions involving which one of the following?

A) Mortgage on a house
B) Purchase of waterfront property
C) Financing purchase of a sailboat
D) Mechanic's lien on an automobile

Question 47

Which of the following is NOT included in the rules of priority established by Article 9?

A) A creditor with a perfected security interest has superior rights in the collateral over a creditor with an unperfected security interest
B) Conflicting perfected security interests rank according to priority in time of filing or perfection
C) As long as conflicting security interests are unperfected, the first to attach has priority
D) Security interests are ranked in order by date of obligation (oldest debts have first priority.)

Question 48

Laura is considering the possibility of becoming a surety to Carl on a debt by David, but she would like more information on the relationship between Carl and David concerning the transaction. If Laura requests such information from Carl, he must disclose it, because his failure to disclose material facts will constitute fraud.

Question 49

"Attachment" occurs when a secured party has given value, the debtor acquires rights in the collateral, and the:

A) debtor has paid one installment of his obligation.
B) collateral is delivered to the borrower.
C) debtor and secured party have an agreement.
D) debtor has completed his obligation to pay.

Question 50

Bill lends Harvey $500 and the loan is secured by Harvey's furniture. If Bill files a financing statement on January 30, 2010, how long will he keep his security interest?

A) Until July 30, 2015
B) Until January 30, 2013
C) Until July 30, 2015, unless a continuation statement is filed
D) Until January 30, 2020, if a continuation statement is filed

Question 51

Jack and Karin are cosureties on a debt owed by Lyle to Mike. If Lyle's debt becomes due and he and Karin both refuse to pay it, Jack may bring an action in equity against Karin to obtain an order requiring her to pay her share of the debt.

Question 52

Jill owns and operates a donut shop. Under the Code, the flour, sugar, and other goods used by Jill to make donuts are classified as:

A) farm products.
B) fixtures.
C) consumer goods.
D) inventory.

Question 53

Beth recently purchased a stereo system for her apartment and a new sailboat. She financed the purchases with XYX Finance Co. Under the Code, these items are classified as:

A) consumer goods.
B) equipment.
C) inventory.
D) real property.

Question 54

A dealer sells goods on credit to a buyer who uses the goods as equipment. The dealer keeps a purchase money security interest in the goods. The dealer then borrows against the security agreement of the buyer along with the dealer's security interest in the collateral. The collateral provided by the dealer to his lender in this type of transaction is:

A) investment property.
B) chattel paper.
C) a document of title.
D) negotiable instruments.

Question 55

Gary owns and operates a farm and a farm machinery dealership. Under the Code, a new tractor that Gary has for sale at his dealership is classified as:

A) farm products.
B) equipment.
C) consumer goods.
D) inventory.

Question 56

A buyer of goods who buys without knowledge of a security interest, for value, and primarily for personal, family, or household purposes takes the goods:

A) subject to any purchase money security interest automatically perfected.
B) subject to all security interests in the goods.
C) free of any purchase money security interest automatically perfected.
D) free of a security interest perfected by filing.

Question 57

Indispensable paper includes:

A) documents of title.
B) accounts receivable for a business.
C) patents.
D) a contract evidencing literary rights.

Question 58

Authentication of a security agreement may occur by the debtor's encrypting a record in part, with the present intent of the authenticating party's accepting the record.

Question 59

Dr. Wells purchased a refrigerator to use for storing medications at his office. The refrigerator will be classified as:

A) consumer goods.
B) equipment.
C) a fixture.
D) inventory.

Question 60

In which of the following situations would the buyer not qualify as "buyer in the ordinary course of business"?

A) Susie buys her classmate Jill's car from her.
B) Caroline buys a refrigerator from Sears.
C) James buys eggs from the supermarket.
D) Todd buys a bicycle at his friend Joe's shop.

Question 61

Upon the surety's payment of the principal debtor's entire obligation, the surety obtains all of the rights the creditor has against or through the principal debtor. The term for the surety's "stepping into the shoes" of the creditor is known as:

A) contribution.
B) subrogation.
C) reimbursement.
D) exoneration.

Question 62

As a general rule, for purposes of attachment of a security interest, a debtor is deemed to have rights in collateral that she:

A) owns.
B) has in her possession.
C) is in the process of acquiring from a seller.
D) All of these.

Question 63

Dale defaults on a car loan secured by his car and guaranteed by both Sam and Dave. Subrogation would allow Sam, who paid Dale's full obligation, to:

A) repossess the car.
B) collect from Dave.
C) collect from Dale.
D) All of these.

Question 64

A bond which guarantees the performance of the terms of a contract is a(n) bond.

A) judicial
B) official
C) performance
D) fidelity

Question 65

Revised Article 9 removes the requirement of from the financing statement.

A) notice filing
B) the debtor's signature
C) the name of the secured party
D) an indication of the collateral covered by the financing statement

Question 66

_{65. A bond is provided on behalf of a party to a proceeding to cover losses caused by delay or deprivation of the}
Use of property resulting from the institution of the action.

A) judicial
B) fidelity
C) performance
D) bail

Question 67

If the principal debtor defaults, the surety has rights against the principal debtor, third parties, and cosureties. These rights would include:

A) exoneration.
B) reimbursement.
C) subrogation.
D) All of these.

Question 68

Which of the following is NOT a method by which a security interest be perfected in collateral?

A) By the secured party's filing a financing statement in the designated public office
B) By the secured party's taking or retaining possession of the collateral
C) Automatically, on the attachment of the security interest
D) By the secured party having a signed agreement describing the collateral in detail.

Question 69

Inventory includes:

A) goods held for sale or lease.
B) farm products.
C) equipment.
D) intangible products.

Question 70

Dayton Hardware Store and Leighton Bank enter a loan agreement in which Leighton agrees to lend $10,000 on the security of Dayton's existing store equipment. A security agreement is executed and a financing statement is filed, but no funds are advanced. A week later, Dayton enters a loan agreement with Ramos Bank in which Ramos agrees to lend $10,000 on the security of the same store equipment. The funds are advanced, a security agreement is executed, and a financing statement is filed. A week later, Leighton Bank advances the agreed $10,000. Dayton defaults on both loans. In this case:

A) between Leighton Bank and Ramos Bank, Ramos has priority because it advanced the funds before Leighton Bank did.
B) between Leighton Bank and Ramos Bank, Leighton Bank has priority because it was the first to deal with Dayton in the matter.
C) between Leighton Bank and Ramos Bank, Leighton Bank has priority because priority among security interests perfected by filing is determined by the order in which the financing statements were filed.
D) neither bank needed to check filings of financing statements because the filings had no impact on which bank had priority.

Question 71

A defense that can only be asserted by the principal debtor is called a defense.

A) real
B) subrogated
C) personal
D) joint

Question 72

Kay borrowed $200,000 for her business. First Bank loaned the money but required a surety and collateral. Kay put up her boat, valued at $110,000, and Anson agreed to guarantee the entire loan. After Kay had paid $50,000 of the loan, she asked First Bank to release the collateral since she wanted to sell it to her brother. The bank looked at her perfect payment record and agreed. Two weeks later, she sold the business, took the boat to Brazil, and never was heard from again. Can First Bank collect from Anson?

A) No, since they released the collateral
B) Yes, but only $40,000
C) Yes, but only $90,000
D) Yes, and they can get the whole remaining obligation

Question 73

Glenn decided to borrow from Jones Bank since it promised that his loan interest rate would be systematically reduced every year when the board met. The loan rate was never reduced, but actually increased monthly. Glenn refused to pay the interest demanded and sued for rescission of the contract; thereupon, the bank attempted to collect from Lewis, a surety under the loan. Does Lewis have to pay?

A) Yes, because fraud is no defense
B) No, because a fraud perpetrated upon Glenn will be a defense
C) Yes, since the surety obligation is separate from the underlying contract
D) No, because the surety stands in the shoes of the debtor for all purposes

Question 74

Because of the , the contractual promise of a surety to the creditor must be in writing to be enforceable.

A) main purpose doctrine
B) Uniform Commercial Code
C) Bankruptcy Act
D) statute of frauds

Question 75

Max pressured Madeline to cosign his car loan, telling her he would otherwise reveal secrets about her that would taint her reputation for honesty. When Max defaults and the creditor tries to collect from Madeline, she:

A) must pay since duress will not be a defense.
B) must pay because she voluntarily agreed to pay.
C) does not have to pay since she did not really assent.
D) does not have to pay because there was no consideration.

Question 76

Fred agreed to loan George $10,000 for his retail store for which George signed a promissory note. Two months later, Fred heard that George's business was in trouble and that he might not be able to repay the loan. As a result of hearing this information, Fred asked Herman to guarantee the loan. Herman gave a glowing oral endorsement of George and of George's business and then orally promised to pay the $10,000 if George did not. Herman has done business with George for 10 years and George buys his entire inventory from Herman's wholesale outlet. Herman adds that George is his major customer. Is Herman's agreement to pay the $10,000 if George does not pay it enforceable?

A) No, because the statute of frauds requires that the suretyship agreement be in writing
B) Yes, because even though the statute of frauds applies, the main purpose rule exception will probably make the agreement enforceable
C) No, because there is a personal defense available
D) Yes, because Herman's is a conditional guaranty of collection

Question 77

Alice loans George $500 and Sue acts as surety under the loan agreement. When George defaults, Alice comes to Sue to collect the $500. Sue reaches a settlement to pay $400 to Alice in complete satisfaction of the loan. What recourse does Sue have against George?

A) She can require reimbursement of $400.
B) She can require payment of $500.
C) She can require payment of $100.
D) She cannot require him to pay her, since she accepted the risk of liability.

Question 78

Specialized suretyships would include:

A) fidelity.
B) incorporate.
C) non-official.
D) legislative.

Question 79

An undertaking by a surety to protect an employer against the dishonesty of an employee is a(n) bond.

A) performance
B) fidelity
C) judicial
D) official

Question 80

Which of the following would not help a surety defend himself from payment of a debt?

A) There was no consideration for the surety agreement.
B) There was a modification of the underlying contract.
C) The creditor knew the loan was risky and did not dissolve it.
D) There was fraud in the execution of the surety agreement.